MULTIPLE CHOICE SECTION

1) GDP is 1,000, consumption is 800, investment is 250, and exports are 150. Then, imports are:

a) 200

b) 1200

c) 100

d) 400

2) GDP is 1,300, consumption is 1100, investment is 50, exports are 50 and imports are 100. Government spending is:

a) 75

b) 625

c) 215

d) 200

3) Which of the following is not considered investment (I)?

a) A purchase of new computer software and hardware by Drexel University

b) Construction of a residential housing scheme

c) Purchase of $100 worth of US government bonds in Wall?Street

d) Purchase of a new piece of equipment by Joe Addy's contractors

4) Which of the following is not considered consumption (C)?

a) Purchase of a new imported Japanese car by John

b) Purchase of medical services by Mary

c) Purchase of a new building by Drexel

d) Purchase of a newly built home by the Smith's

e) Both c and d

5) The MPC can be defined as:

a) The absolute change in consumption for a $1 change in disposable income

b) The increase in consumption for a $1 change in disposable income

c) The absolute change in consumption for a 1% change in disposable income

d) The amount of consumption that takes place regardless of income

6) The following event will have a positive impact on the AS curve:

a) A hurricane destroys 30% of the economy's capital stock.

b) Labor productivity rises as a result of important investment in human capital.

c) The cost of imported inputs increases significantly

d) Both b and c.

7) I) A common assumption in Economics is that a country's exports are not significantly affected by that country's GDP.

II) An increase in corporate taxes lowers investment.

a) I and II are true.

b) I and II are false.

c) I is true, II is false.

d) I is false, II is true.

8) I) An economy can always self-adjust instantaneously out of a recessionary gap. II) Contractionary policies help an economy get rid of inflationary pressures.

a) I and II are true.

b) I and II are false.

c) I is true, II is false.

d) I is false, II is true.

9) An equilibrium point beyond a potential GDP is termed as

a)deflationary gap.

b) recessionary gap.

c)inflationary gap.

d) acceleration gap

10) One of the justifications of government stabilization policy is that it may

a) increase the fluctuations in inflation and employment.

b) increase the multiplier effect of changes in autonomous spending.

c) increase the volatility of economic variables.

d) reduce the severity of inflation and unemployment.

SHORT ANSWER SECTION

Question 1:

Explain what will happen to AD and GDP as a result of the following events. Why? (i.e. how does each component of AD behave in each case?)

a. If the interest rate goes down.

b. Canada is experiencing a boom in economic activity. Canada is one of the US main trading partners. How will this increase in Canadian GDP affect AD in the US ?

c. The citizens of country ABC expect their future income to rise next year when significant tax cuts will be implemented. How is AD affected in country ABC today?

d. US relative prices fall relative to Japanese prices.

Question 2:

Define the terms recessionary gap and inflationary gap. Why do they occur?

Question 3:

Draw a AD graph showing the case of a recessionary gap. Then:?(a) Show what happens to the AD curve if the government decides to cut taxes? (b) What happens to the equilibrium level of output? What to the price level?

Question 4:

Which factors will cause the consumption function to shift? Which factors do not cause the function to shift?

Question 5:

The expenditure schedule and the aggregate demand curve show much the same thing, with one crucial difference-the price level. How does the price level affect the two schedules?

Question 6:

Where does equilibrium occur in an income expenditure diagram? What would be the effect if production is at either on the left or right side of the equilibrium point?